Fighting poverty

Fight poverty with experiments

Patricio Dalton and Elena Cettolin build on research by Nobel laureates with the ultimate goal of helping people escape poverty.

By Joris Janssen

How can you get an economy up and running? And how do you keep it that way? The science of economics has no shortage of complex theories, models, and ways of thinking about this. But how do you find out whether an economic measure devised somewhere around a policy-making table

14 | New Scientist | Tilburg University Economics and Management | Research Special actually makes sense? For this, economists are getting help from an unexpected source: medicine.

After all, the way in which researchers test whether a drug works is also very suitable for testing whether economic interventions work. Take, for example, research into the effectiveness of all kinds of development aid. The method works so well that the three economists who introduced this research strategy into economics science received the Nobel Prize for it in 2019. Esther Duflo, Abhijit Banerjee, and Michael Kremer have since become true celebrities in the relatively new research field of experimental economics.

Development economist Patricio Dalton and experimental economist Elena Cettolin,

The research that developmental economist Patricio Dalton and experimental economist Elena Cettolin do is different, but their goal is the same: to help people escape poverty.

both of Tilburg University, build on the research of these Nobel Prize winners. Each in their own way: Dalton does a lot of research in developing countries, Cettolin tests economic theories in a laboratory setting. Even so, their worlds overlap considerably. Not only because they are a couple as well as colleagues, but also because the ultimate goal of their research is the same: to help people escape poverty.

Entrepreneurs in Indonesia In recent years, Dalton’s work focused on countries such as Kenya, Ghana, and Indonesia. There, he researched the barriers that small entrepreneurs encounter in their attempts to grow their business. Together with his colleagues, Dalton received a grant of four million euros from the Department for International Development, a UK government agency responsible for development aid.

In Indonesia, the Dalton team took a close look at retailers. In a city like Jakarta, there are thousands, maybe hundreds of thousands of them. And although at first glance they look very similar, they are quite

“Surprisingly, we found that people who were stressed don’t act more irrationally”

different from each other, Dalton discovered. “Some work in an enormously efficient way and succeed in growing their business. Others don’t grow at all. We wanted to study what kind of practices all these entrepreneurs have in terms of, for example, reporting, marketing strategies, planning, and whether they discuss important decisions with friends and family. Then we looked at which practices contribute to the success of the small businesses.” To this end, the team conducted in-depth interviews with around one hundred retailers, after which they compared the results with the performance of the companies. This resulted in a list of ten best practices. Then it was time for the experimental part of the research: if you compile these best practices in a handbook, together with guidelines on how to implement them and a number of known pitfalls to avoid, can you help other entrepreneurs grow?

A group of 260 randomly selected retailers received the handbook. Another group of 260 received not only the manual, but also two half-hour help session to implement the tips. Another 260 received the handbook and the opportunity to watch a documentary about fellow entrepreneurs who already successfully put the tips into practice. Finally, the same number of entrepreneurs received the total package, and one last set of entrepreneurs, the control group, received nothing at all.

“Then we waited eighteen months,” says Dalton. “After that, we looked at which tips had been taken up, which entrepreneurs had or had not started working with them, and whether this had had an effect on their income.”

Dalton’s research is a textbook example of ‘randomized research with control group’, a research strategy that has been commonplace in medicine for centuries. Scottish doctor James Lind first used the technique in 1747 to find out how best to treat scurvy – at least his report is the oldest description of it. Randomized controlled trials (RCTs) have since found their way into psychology, education, agriculture, and, for twenty years, economics.

Poverty and stress For economic experiments, however, you don’t necessarily have to go out into the field like Dalton does. There is also plenty to be gained in the laboratory, for example if you want to investigate how people make economic decisions – the discipline that Elena Cettolin is involved in.

Are people’s economic decisions always rational? And if not, what influences the extent to which people are able to act rationally? If you want answers to such specific questions, then as a researcher you need to be able to control your variables as well as possible. Research in the field is all well and good, but what you really need is an

“Esther Duflo will be a very important role model for women in economics”

environment that is stripped of undesirable external influences to the extent possible.

In her research, Cettolin focuses, among other things, on whether poverty has a negative impact on people’s ability to make rational decisions. This is a salient research topic, because the line of reasoning tends to be reversed: that poor people are poor because they make irrational, and therefore worse, decisions. “Our assumption is that poor people experience more stress than other people, because they are more frequently confronted with circumstances that give cause for concern,” says Cettolin. “We want to study whether this hinders rational thinking.”

In a recent experiment, Cettolin had a number of test subjects perform a task that caused them a lot of stress. The stress level could be measured by looking at saliva particles. Subsequently, the subjects had to make a number of economic decisions. This showed how rationally they acted at that moment. And the results? “Surprisingly, we found that the people who were stressed did not act more irrationally,” says Cettolin. In her opinion, this does not mean that there is no definitive link between stress and the rationality of one’s decisions. “We have tested a situation with extremely high, but short-term stress. The next step is to look at decision making in people suffering from chronic stress.”

Because you can zoom in on individual economic theories and predictions very well in the laboratory, it is a very good addition to research in the field, such as that of colleague and partner Patricio Dalton. “The lab and the field don’t have to compete with each other,” says Cettolin.

Nobel Prize as stimulus With their research, both Cettolin and Dalton stand on the shoulders of Nobel Prize winners Duflo, Banerjee, and Kremer. They introduced experimental methods to economics and laid the foundation for such experiments to be carried out “in the wild” of everyday practice in emerging economies. “We owe almost everything to them,” says Dalton. “They themselves copied this methodology from the field of medicine and began investigating how it can be used to help people escape poverty. Moreover, and equally important, they developed the organizations that enable scientists to carry

16 | New Scientist | Tilburg University Economics and Management | Research Special out research in developing countries under complex conditions. For example, without an organization like the Abdul Latif Jameel Poverty Action Lab (J-Pal), my research in Indonesia would not have been possible.” Cettolin shares this view. She believes Duflo, Banerjee, and Kremer revolutionized the way people in the field of economics think about testing policies and making causal connections. She also points to a nice potential finding of the awarded Nobel Prize. “Duflo is the youngest winner of this prize ever. And she’s also a woman – only the second to win this prize. I think this will make her a very important role model for women in economics.”

Back to Indonesia. What was the result of Patricio Dalton and colleagues’ RCT? The handbook full of tips in combination with the film and, in particular, the two help sessions increased the income of the entrepreneurs by 30 percent. Dalton is delighted with this outcome. “This is an incredible result. The costs for this project were 120 dollars per entrepreneur and their income increased by no less than 300 dollars per month.”

RCTs such as Dalton’s have already given many people in emerging economies a push in the right direction. “According to Esther Duflo’s estimate, around 400 million people have benefited from programs that were scaled up after their effect was demonstrated by an RCT,” says Cettolin. The experimental work of economists such as Dalton, Cettolin, and the Nobel Prize-winning founders is really only just beginning. “I think the research field is going to grow explosively in the near future,” says Dalton. “The Nobel Prize has been a great stimulus. RCTs are now an established method in a field in which many people are doing all manner of creative things that build on the work of the three Nobel Prize winners.”

And the good thing is: where policymakers sometimes still have difficulty converting the results of scientific research into action – how long did it take for significant climate measures to be taken – they seem to take the results of experimental economics to heart. “RCTs are currently the best we have to demonstrate causal links between economic measures and their effects,” Cettolin explains. “That just can’t be ignored.”